Since the start of 2016, median European PE buyout EV/EBITDA multiples had been rising steadily before ending in a decade high of 11.8x last year. The wave of generous multiples was attributed to the amount of dry powder available to investors as capital has flooded into the PE market in pursuit of a limited number of deals.
The trend was also exaggerated somewhat by the fact that the potential targets had more options when it came to raising capital—be it debt or equity—thanks in part to historically low interest rates that have made borrowing easier. However, the tide turned in 2Q when multiples took a nosedive and continued to do so into the following quarter, resulting in an 8.9x median EV/EBITDA multiple for the year to September 30. Taking a broad view and considering the immediate years following the financial crisis, that is not remarkably low. Nevertheless, it does look as if the recent upward trajectory in multiples is stabilizing.
Echoes of a crisis?
This reveals a shift in strategies as GPs manage challenges from evolving economic conditions. It is no secret that investor appetite in Europe has been buffeted by ongoing uncertainty, particularly over Brexit. As the UK has veered ever closer to an impending "no-deal" exit on October 31, decisions are being delayed. Furthermore, an ongoing trade spat between the EU and the US—in addition to the knock-on effects of the latter's trade war with China—is having an impact. Interestingly, the same drop in multiples has not been seen in the US, per PitchBook's 3Q 2019 US PE Breakdown. In fact, 2019 is on track to achieve record levels.
The fall in European multiples is reminiscent of a decade ago. Over the past ten years, European PE buyout EV/EBITDA multiples have typically outstripped public multiples on an annual basis. In 2019, as in 2009, the reverse has occurred.
Another factor, for example, is the recent proliferation of bolt-on deals. In the first three quarters of 2019, bolt-on acquisitions accounted for 43% of all PE deals, while 36% were buyouts and 20% were growth deals. Bolt-on transactions have been valuable for GPs at times when multiples in the broader buyout market have been excessive, as smaller transactions typically command reduced multiples in comparison to large outlier buyouts. Now these smaller deals comprise a much larger share of the market, as investors look to build out established platforms.
Also, Europe's private market valuations may be entering an extended cooling period, as large PE managers continue to delve into public markets through a combination of take-privates and corporate carve-outs—driving up public valuations and broadening the gap between public and private market multiples in the process.
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Read more about Europe's private equity landscape in our recent report.